Category Archives: Alcatel-Lucent

Dell reported its third-quarter earnings yesterday, and reactions to the news generally made for grim reading. The company cannot help but know that it faces a serious dilemma: It must continue an aggressive shift into enterprise solutions while propping up a punch-drunk personal-computer business that is staggered, bloody, and all but beaten.

The word “dilemma” is particularly appropriate in this context. The definition of dilemma is “a situation in which a difficult choice has to be made between two or more alternatives, especially equally undesirable ones.”

Hard Choices

Dell seems too attached to the PC to give it up, but in the unlikely event that Dell chose to kick to the commoditized box to the curb, it would surrender a large, though diminishing, pool of low-margin revenue. The market would react adversely, particularly if Dell were not able to accelerate growth in other areas.

While Dell is growing its revenue in servers and networking, especially the latter, those numbers aren’t rising fast enough to compensate for erosion in what Dell calls “mobility” and “desktop.” What’s more, Dell’s storage business has gone into a funk, with “Dell-owned IP storage revenue” down 3% on a year-to-year basis.

Increased Enterprise Focus

To its credit, Dell seems to recognize that it needs to pull out all the stops. It continues to make acquisitions, most of them related to software, designed bolster its enterprise-solutions profile. Today, in fact, it announced the acquisition of Gale Technologies, and it also announced that Dario Zamarian, a former Cisco executive who has been serving as VP and GM of Dell Networking, has become vice president and general manager of the newly formed Dell Enterprise Systems & Solutions, “focused on the delivery of converged and enterprise workload topologies and solutions.” Zamarian will report to former HP executive Marius Haas, president of Dell Enterprise Solutions Group.

Zamarian’s former role as VP and GM of Dell Networking will be assumed by Tom Burns, who comes directly from Alcatel-Lucent, where he served as president of that company’s Enterprise Products Group, which included voice, unified communications, networking, and security solutions.

Dell has the cash to make other acquisitions to strengthen its hand in private and hybrid clouds, and we should expect it to do so. The company would have more cash to make those moves if it were to divest its PC business, but Dell doesn’t seem willing to bite that bullet.

That would be a difficult move to make — wiping out substantial revenue while eliminating a piece of the business that is a vestigial piece of Dell’s identity — but half measures aren’t in Dell’s long-term interests. It needs to be all-in on the enterprise, and I think also needs to adopt a software mindset. As long as the PC business is around, I suspect Dell won’t be able to fully and properly make that transition.

Yes, Avaya’s numbers for its third fiscal quarter of 2012, which ended on June 30, are available for review. I have given the results a cursory look, and I’ve concluded that the story hasn’t changed appreciably since I last wrote about Avaya’s travails. There’s still no prospect of significant revenue growth, quarterly losses continue to accrue, channel sales are edging lower across the company’s product portfolio, and the long-term debt overhang remains formidable.

Goodwill Impairment?

And there’s something else, which I neglected to mention previously: a persistently high amount of goodwill on the asset side of the ledger, at least some of which might have to be written down before long. The company’s goodwill assumptions seem willfully optimistic, and even Avaya concedes that “it may be necessary to record impairment charges in the future” if “market conditions continue to deteriorate, or if the company is unable to execute on its cost-reduction efforts.” While I believe the company will persist with its cost-reduction efforts, I don’t see a meaningful near-term turnaround in macroeconomic conditions or in the growth profile of the company’s product portfolio. Ergo, impairment charges seem inevitable.

In this regard, what you need to know is that Avaya is carrying goodwill of about $4.2 billion on its books as of June 30, up from nearly $4.1 billion as of September 30, 2011. The company’s total assets are about $8.24 billion, which means goodwill accounts for more than half that total.

For those desirous of a quick summary of revenue and net loss for the year, I can report that total revenue, including sales of products and services, amounted to $1.25 billion in the quarter, down from $1.37 billion in the corresponding quarter last year, a year-on-year decrease of $122 million or about 9 percent. Product sales were down across the board, except in networking, where sales edged up modestly to $74 million in the quarter this year from $71 million last year. Service revenue also was down. For the nine-month period ended on June 30, revenues also were down compared to the same period the previous year, dropping from $4.13 billion last year to about $3.9 billion this year.

Mulling the Options

Avaya’s net loss in the quarter was $166 million, up from $152 million last year.

The critical challenge for Avaya will be growth. The books show that the company is maintaining level spending on research and development, but one wonders whether its acquisition strategy or its R&D efforts will be sufficient to identify a new source of meaningful revenue growth, especially as it finds itself under mounting pressure to contain costs and expunge ongoing losses. Meanwhile, a foreboding long-term debt looms, kicked down the road but still a notable concern.

With the road to IPO effectively blocked — I really can’t see a way for Avaya to get back on that track now — Avaya’s private-equity sponsors, Silver Lake Partners and TPG Capital, must consider their options. Is there a potential strategic acquirer out there? Can the company be sold in whole, or will it have to be sold in parts? Or will the sponsors just hang on, hoping continued cost cutting and a strategic overhaul, perhaps including a change in executive leadership, might get the company back on course?

Like this:

Late last week, I had the opportunity to speak with David Fratura, Alcatel-Lucent’s senior director of strategy for cloud solutions, about his company’s new foray into cloud computing, CloudBand, which is designed to give Alcatel-Lucent’s carrier customers a competitive edge in delivering cloud services to their enterprise clientele and — perhaps to a lesser extent — to consumers, too.

Like so many others in the telecommunications-equipment market, Alcatel-Lucent is under pressure on multiple fronts. In a protracted period of global economic uncertainty, carriers are understandably circumspect about their capital spending, focusing investments primarily on areas that will result in near-term reduced operating costs or similarly immediate new service revenues. Carriers are reluctant to spend much in hopeful anticipation of future growth for existing services; instead, they’re preoccupied with squeezing more value from the infrastructure they already own or with finding entirely new streams of service-based revenue growth, preferably at the lowest-possible cost of market entry.

Big Stakes, Complicated Game

Complicating the situation for Alcatel-Lucent — as well as for Nokia Siemens Networks and longtime market wireless-gear market leader Ericsson — are the steady competitive advances being made into both developed and developing markets by Chinese telco-equipment vendors Huawei and ZTE. That competitive dynamic is putting downward pressure on hardware margins for the old-guard vendors, compelling them to look to software and services for diversification, differentiation, and future growth.

For its part, Alcatel-Lucent has sought to establish itself as a vendor that can help its operator customers derive new revenue from mobile software and services and, increasingly, from cloud computing.

Alcatel-Lucent CEO Ben Verwaayen is banking on those initiatives to save his job as well as to revive the company’s growth profile. Word from sources close the company, as reported first by the Wall Street Journal, is that the boardroom knives are out for the man in Alcatel’s big chair, though Alcatel-Lucent chairman Philippe Camus felt compelled to respond to the intensifying scuttlebutt by providing Verwaayen with a qualified vote of confidence.

Looking Up

With Verwaayen counting on growth markets such as cloud computing to pull him and Alcatel-Lucent out of the line of fire, CloudBand can be seen as something more than the standard product announcement. There’s a bigger context, encompassing not only Alcatel-Lucent’s ambitions but also the evolution of the broader telecommunications industry.

CloudBand, according to a company-issued press release, is designed to deliver a “foundation for a new class of ‘carrier cloud’ services that will enable communications service providers to bring the benefits of the cloud to their own networks and business operations, and put them in an ideal position to offer a new range of high-performance cloud services to enterprises and consumers.”

In a world where everybody is trying to contribute to or be the cloud, that’s a tall order, so let’s take a look at the architecture Alcatel-Lucent has brought forward to create its “carrier cloud.”

CloudBand Architecture

CloudBand comprises two distinct elements. First up is the CloudBand Management System, derived from research work at the venerable Bell Labs, which delivers orchestration and optimization of services between the communications network and the cloud. The second element is the CloudBand Node, which provides computing, storage, and networking hardware and associated software to host a wide range of cloud services. Alcatel-Lucent’s “secret sauce,” and hence its potential to draw meaningful long-term business from its installed base of carrier customers, is the former, but the latter also is of interest.

Hewlett-Packard, as part of a ten-year strategic global agreement with Alcatel-Lucent, will provide converged data-center infrastructure for the CloudBand nodes, including compute, storage, and networking technologies. While Alcatel-Lucent has said it can accommodate gear from other vendors in the nodes, HP’s offerings will be positioned as the default option in the CloudBand nodes. Alcatel-Lucent’s relationship with HP was intended to help “bridge the gap between the data center and the network,” and the CloudBand node definitely fits within that mandate.

Virtualized Network Elements in “Carrier Clouds”

By enabling operators to shift to a cloud-based delivery model, CloudBand is intended to help service providers market and deliver new services to customers quickly, with improved quality of service and at lower cost. Carriers can use CloudBand to virtualize their network elements, converting them to software and running them on demand in their “carrier clouds.” As a result, service providers presumably will derive improved utilization from their network resources, saving money on the delivery of existing services — such as SMS and video — and testing and introducing new ones at lower costs.

Alcatel-Lucent has done market research indicating that enterprise IT decision makers’ primary concern about the cloud involves performance rather than security, though both ranked highly. Alcatel-Lucent also found that those same enterprise IT decision makers believe their communications service providers — yes, carriers — are best equipped to deliver the required performance and quality of service.

Helping Carriers Capture Cloud Real Estate

Although Alcatel-Lucent talks a bit about consumer-oriented cloud services, it’s clear that the enterprise is where it really believes it can help its carrier customers gain traction. That’s an important distinction, too, because it means Alcatel-Lucent might be able to help its customers carve out a niche beyond consumer-focused cloud purveyors such as Google, Facebook, Apple, and even Microsoft. It also means it might be able to assist carriers in differentiate themselves from infrastructure-as-a-service (IaaS) leader Amazon Web Services (AWS), which became the service of choice for technology startups, and from the likes of Rackspace.

As Alcatel-Lucent’s Fratura emphasized, many businesses, from SMBs up to large enterprises, already obtain hosted services and software-as-a-service (SaaS) offerings from carriers today. What Alcatel-Lucent proposes with CloudBand is designed to help them capture more of the cloud market.

It just might work, but it won’t be easy. As Ray Le Maistre at LightReading wrote, cloud solutions on this scale are not a walk on the beach or a day at the park (yes, you saw what I did there). What’s more, Alcatel-Lucent will have to hope that a sufficient number of its carrier customers can deploy, operate, and manage CloudBand to full effect. That’s not a given, even if Alcatel-Lucent offers CloudBand as managed service and even though it already sells and delivers professional services to carriers.

Alcatel-Lucent says CloudBand will be available for deployment in the first half of 2012. At first, CloudBand will run exclusively on Alcatel-Lucent technology, but the company claims to be working with the Alliance for Telecommunications Industry Solutions (ATIS) and the Internet Engineering Task Force (IETF) to establish standards to enable CloudBand to run on gear from other vendors.

In addition, of course, the carriers themselves are a factor. Although they undoubtedly want to get their hands around the cloud business opportunity, there’s some question as to whether they have the wherewithal to get the job done. The rise of cloud services from Google, Apple, Facebook, Amazon was partly a result of carriers missing a golden opportunity. One would like to think they’ve learned from those sobering experiences, but one also can’t be sure they won’t run to prior form.

From what I have heard and seen, the Alcatel-Lucent vision for CloudBand is compelling. It brings the benefits of virtualization and orchestration to carrier network infrastructure, enabling the latter to manage their resources cost-effectively and innovatively. If they seize the opportunity, they’ll save money on their own existing services and be in a great position to deliver range of cloud-based enterprise services to their business customers.

Alcatel-Lucent should find a receptive audience for CloudBand among its carrier installed base. The question is whether those Alcatel-Lucent customers will be able to get full measure from the technology and from the business opportunity the cloud represents.

Long before that, back in June, Avaya first indicated that it would file for an IPO, from which it hoped to raise about $1 billion. Presuming the IPO goes ahead before the end of this year, Avaya could find itself valued at $5 billion or more, which would be about 40 percent less than private-equity investors Silver Lake and TPG paid to become owners of the company back in 2007.

Proceeds for Debt Relief

Speaking of which, Silver Lake and TPG will be hoping the IPO can move ahead sooner rather than later. As parents and controlling shareholders of Avaya, their objectives for the IPO are relatively straightforward. They want to use the proceeds to pay down rather substantial debt (total indebtedness was $6.176 billion as of March 31), redeem preferred stock, and pay management termination fees to its sponsors, which happen to be Silver Lake and TPG. (For the record, the lead underwriters for the transaction, presuming it happens, are J.P. Morgan, Morgan Stanley, and Goldman Sachs & Company.)

In filing for the IPO, Avaya has come clean not only about its debts, but also about its losses. For the six-month period that end on March 31, Avaya recorded a net loss of $612 million on revenue of $2.76 billion. It added a further net loss of $152 million losses the three-month period ended on June 30, according to a recent 10-Q filing with the SEC, which means it accrued a net loss of approximately $764 million in its first three quarters of fiscal 2011.

Big Losses Disclosed

Prior to that, Avaya posted a net loss of $871 million in its fiscal 2010, which closed on September 30 of 2010, and also incurred previous losses of $835 million in fiscal 2009 and a whopping $1.3 billion in fiscal 2008.

Revenue is a brighter story for the company. For the one months ended June 30, Avaya had revenue of more than $2.2 billion, up from $1.89 billion in the first nine months of fiscal 2010. For the third quarter, Avaya’s revenue was $729 million, up from $700 million in the corresponding quarter a year earlier.

What’s more, Avaya, which bills itself as a “leading global provider of business collaboration and communications solutions,” still sits near the front of the pack qualitatively and quantitatively in the PBX market and in the unified-communications space, though its standing in the latter is subject to constant encroachment from both conventional and unconventional threats.

Meanwhile, Gartner lists Avaya among the market leaders in its Magic Quadrant for unified communications, but the threats there are many and increasingly formidable. Microsoft and Cisco top the field, with Avaya competing hard to stay in the race along with Siemens Enterprise Networks and Alcatel-Lucent. ShoreTel is gaining some ground, and Mitel keeps working to gain a stronger channel presence in the SMB segment. In the UC space, as in so many others, Huawei looms as potential threat, gaining initial traction in China and in developing markets before making a stronger push in developed markets such as Europe and North America.

There’s an irony in Microsoft’s Lync Server 2010 emerging as a market-leading threat to Avaya’s UC aspirations. As those with long memories will recall, Microsoft struck a valuable UC-centric strategic alliance — for Microsoft, anyway — with Nortel Networks back in 2006. Microsoft got VoIP credibility, cross-licensed intellectual property, IP PBX expertise and knowledge — all of which provided a foundation and a wellspring for what Microsoft eventually wrought with Lync Server 2010.

The Nortel Connection

What did Nortel get from the alliance? Well, it got some evanescent press coverage, a slippery lifeline in its faltering battle for survival, and a little more time than it might have had otherwise. Nortel was doomed, sliding into irrelevance, and it grabbed at the straws Microsoft offered.

Now, let’s fast forward a few years. In September 2009, Avaya successfully bid for Nortel’s enterprise solutions business at a bankruptcy auction for a final price of $933 million. Avaya’s private-equity sponsors saw the Nortel acquisition as the finishing touch that would position the company for a lucrative IPO. The thinking was that the Nortel going-out-of-business sale would give Avaya an increased channel presence and some incremental technology that would help it expand distribution and sales.

My feeling, though, is that Avaya overpaid for the Nortel business. There’s a lot of Nortel-related goodwill still on Avaya’s books that could be rendered impaired relatively soon or further into the future. In addition to Nortel’s significant debt and its continuing losses, watch out for further impairment relating to its 2009 purchase of Nortel’s assets.

As Microsoft seeks to take UC business away from Avaya with expertise and knowhow it at least partly obtained through a partnership with a faltering Nortel, Avaya may also damage itself through acquisition and ownership of assets that it procured from a bankrupt Nortel.

I spoke earlier today with representatives of Alcatel-Lucent about the company’s acquisition of OpenPlug and how it fits into a broader application-enablement strategy that bridges developers and service providers.

Laura Merling, vice president of Alcatel-Lucent’s developer platforms and related programs, explained that company’s move into developer tools is part of a long-term strategy that could help redefine the relationship between developers, primarily of the mobile variety, and service providers. In the process, of course, it also could help redefine Alcatel-Lucent relationships with both constituencies, particularly service providers.

The way Alcatel-Lucent sees it, the company is responding to an urgent needs in both camps. For a long time, developers have wanted wireless operators and other carriers to expose more of their network services. Wireless operators, for their part, often have been willing to play along, but they haven’t had the means of doing so. Meanwhile, smartphone vendors, such as Apple and Google, sought to fill the void with device-specific development tools for application creation and monetization.

Sending Strong Signal

With its Open API initiative, its earlier acquisition of ProgrammableWeb, and now its acquisition of OpenPlug, Alcatel-Lucent is sending a strong signal that it is serious about application-enablement. In sending that signal, it’s letting wireless operators know that it’s in their corner as they try to regain some of the developer and subscriber patronage they’ve surrendered to Apple and, increasingly, to Google.

In theory, Alcatel-Lucent’s push to become a valued intermediary between developers and service providers makes sense, but the challenge is daunting. On one side, it must convince developers that it is creating a new broad-based platform that will allow them to address network-layer services and target a wide range of smartphone and feature-phone handsets without having to compromise on application quality. On the other side, it must convince wireless operators and other carriers that it can help them draw the support of developers. It’s a chicken-and-egg dilemma, and it will need support and mutual reinforcement from both parties to have a viable shot at success.

Toward that end, Alcatel-Lucent is working hard to ensure that it precludes potential objections from either side of the aisle. Developers, for instance, can be wary of lowest-common denominator approaches to serving broad-based device demographics. They want to ensure that applications are optimized for the devices on which run and deliver good customer experiences. As such, Alcatel-Lucent takes pains to note that OpenPlug lets developers write once using a single development tool and then compile natively to each operating system.

Indeed, OpenPlug’s ELIPS Studio, which now becomes part of Alcatel Lucent’s developer platform, is a development environment that allows ISVs to create and deploy mobile applications cost-effectively and quickly across iPhone, Android, Symbian, Windows Mobile, Linux, and other systems.

Arrayed Against Apple, Google

Fundamentally, Alcatel-Lucent’s whole application-enablement strategy is intended to put it in league with developers and service providers against the fragmented forces of independent smartphone platforms, such as Apple’s iPhone, Google’s Android, and RIM’s BlackBerry. The smartphone vendors cannot be expected to provide Alcatel-Lucent with any comfort.

Even though the application-enablement initiative is intended to be synergistic with the Alcatel-Lucent’s core business of selling telecommunications equipment, the company is committed to making the the new initiative a going concern in its own right. That will take work and perseverance, but the two acquisitions this year — with perhaps more M&A activity to follow — suggest that the company is in it for the long haul.

It’s good for Alcatel-Lucent to have something like application-enablement in its back pocket as a means of differentiating it from lower-cost telco-equipment vendors such as Huawei and ZTE. It’s also a good insurance policy against margin erosion on the hardware side of the business. On the score, Alcatel-Lucent is taking a “freemium” ad and license-based approach to sales of its application-enablement software to the developer community, and it will sell licenses to wireless operators and other carriers.

Whether Alcatel-Lucent will be successful in its application-enablement capacity remains to be seen, but the company, in making two acquisitions and allocating substantial resources to the effort, does not seem inclined to cut and run.

Since being created as a result of the 2006 merger of the two companies that confer its name, Alcatel-Lucent has struggled unsuccessfully to reach profitability. It’s still struggling for financial stability, but some market watchers and analysts believe there’s light at the end of the tunnel. What’s more, they believe the light in question isn’t coming from an onrushing train.

There is reason for guarded optimism. Operationally and strategically, Alcatel-Lucent is on firmer ground than it has been for quite some time, even in the face of stiff macroeconomic winds and a chronic component shortage that has affected the company’s ability to deliver products.

You’ll notice, though, that I employed a qualifying adjective in the first sentence of the preceding paragraph. Alcatel-Lucent still has work to do.

The company depends on the sustainability of a real broad-based recovery in the global economy — carriers will constrain their network-infrastructure spending if they believe smartphone-toting consumers will curtail their consumption of data-rich applications and data services — and it must work harder to make headway in emerging markets. In the latest quarter, North America carried the day for AlcaLu, and numbers everywhere else were down.

Moreover, as Ray LeMaistre notes and documents at Light Reading, Alcatel-Lucent needs better growth from its Applications and Services divisions, which are strategically important to the company’s long-term prospects. AlcaLu is looking to differentiate itself from lower-cost Chinese network-equipment rivals such as Huawei and ZTE by providing software-led value with its Application Enablement strategy, buttressed by its Developer Platform and its Open API Service.

By bringing developers and carriers together, and providing integration services bridging the two camps, Alcatel-Lucent hopes to make itself more valuable to both. There’s still time for the strategy to play out, but higher rates of growth from those parts of the business would be encouraging.

Let’s say two companies are involved in a joint venture that’s been an unhappy marriage. The relationship isn’t as toxic as the former partnership between Mel Gibson and Oksana Grigorieva, but it hasn’t been a day at the beach, either. Neither partner wants to remain in the business alliance; they’re both looking for a dignified exit.

With logic and reason as your guides, what would you expect their next moves to be?

Yes, one partner might approach the other, looking to sell its interest in full. It’s also possible that one company might sell its interest to an approved third party, offering a right of first refusal to its JV partner. It’s also conceivable that both partners would put the joint venture on the block, hiring an agent to discreet present it to private-equity shops and strategic buyers. They might even consider putting some lipstick on the pig and trying an IPO, hoping to benefit from auspicious timing and favorable lighting.

Just when I think there’s nothing in this crazy industry that can surprise me, something does just that. I admit, I’ve been puzzling over why NSN would buy Motorola’s networks business, which retains some wireless-operator customers, especially in North America, but also carries hefty baggage in the form of a product portfolio predicated on technologies (a large portion of its 3G gear, and its WiMAX 4G offerings) that have gone out of fashion. NSN will pay $1.2 billion for the Motorola unit, and — other than some modest scale and a minor ostensible market-share gain — I don’t see how it derives much benefit from the transaction.

Digressing for a moment, I want to note that I am not a proponent of joint ventures. Many European companies seem favorably disposed to them, and I understand the underlying reasoning behind them: pool resources, share and mitigate risk, eliminate distraction to one’s core business. Unfortunately, they’re usually unworkable in practice. It’s hard enough getting people from the same company to agree on strategy and to execute successfully. When you have the political machinations inherent in a joint venture, well, the job becomes nearly impossible.

Getting back on track after that brief digressive detour, NSN is in a tough spot.

How tough became clear to me after I read an article in the Wall Street Journal yesterday. Neither Nokia nor Siemens wants to continue participating in the joint venture, but they can’t find a way out. It’s as if Jean-Paul Sartre has rewritten No Exit and staged it in a boardroom. Hell is having to deal with other people in a joint venture.